What happened
Shares of recently public WeWork (WE) were soaring on Tuesday, up 10.3% as of 2:40 p.m. ET. The controversial company, whose tumultuous founders have earned it a dramatic treatment called WeCrashed starring Jared Leto and Anne Hathaway on Apple TV+, is hoping for a less dramatic but more profitable turn as a public company under new management.
The company went public last October via a special purpose acquisition company (SPAC) at a $9 billion market cap, but in the ensuing market downturn had fallen below a $5 billion market cap before today.
With many investors likely casting WeWork off due to its controversial past, at least one analyst thinks the hate has gone too far, initiating the company with a buy rating and a price target back up to its SPAC price of $10, roughly 50% above today's price.
So what
If you think about it, with many businesses now adopting a hybrid work environment, lots of companies may turn to the smaller, shared office spaces found at WeWork, rather than going back to buying larger office footprints.
That's the thinking of Piper Sandler analyst Alexander Goldfarb, who initiated WeWork with a buy rating and a $10 price target on Tuesday, up about 50% from the current $6.53 price, following today's bump. Goldfarb pointed out that WeWork now sports a 63% desk utilization rate, up from 45% during COVID-19, and much higher than office utilization, which is still only at 35%. Goldfarb sees WeWork's utilization rising to 85% by the end of 2023, allowing WeWork to achieve profitability by that time.
Image source: Getty Images.
Now what
WeWork may still be a difficult sell to investors in a rising rate environment, as investors have largely favored companies turning out a profit today -- not two years from now. Still, new CEO Sandeep Mathrani is on a mission to cut costs.
He has a growth vision, too. WeWork made a slew of expansionary announcements on its recent earnings release, both organically and through acquisitions. Notably, the company has developed software called WeWork Workspace, which helps companies manage their entire workspace footprints across WeWorks, owned spaces, and non-WeWork co-working spaces. Software is an interesting area, as it is asset-light and usually profitable, which would help the company's bottom line if adopted widely.
Meanwhile, WeWork is expanding its physical footprint as well, purchasing Common Desk in January, a co-working company with 23 locations in North Carolina and Texas. In February, WeWork also made a strategic investment in Upflex, an aggregator platform with 4,800 other co-working spaces across the world.
It looks as though WeWork's vision is to become the dominant platform allowing companies to organize co-working spaces across multiple geographies and covering most of the developed world. If shared and flexible co-working spaces are in fact the future of work, WeWork may indeed be an interesting stock to watch. Just keep in mind, the company is still burning cash and it will take much longer to generate free cash flow. So, WeWork remains a risky, albeit interesting turnaround story.
